Written by

Nathan Bomey and Alisa Priddle

Detroit Free Press Business Writers

It’s an exceedingly rare sight in the U.S. judicial system: a major city trying to prove that it’s bankrupt.

But that’s exactly what Detroit will attempt to do when its Chapter 9 bankruptcy eligibility trial begins Wednesday.

No one questions that the city’s financial situation and future projections are horrendous, but federal law requires cities to meet specific criteria to secure court protection from creditors.

U.S. Bankruptcy Judge Steven Rhodes will decide whether Detroit is eligible for bankruptcy protection. His decision will determine whether Detroit can slash billions in debt and liabilities, potentially putting the city on a financially sustainable path for the future.

But it could also serve as a precursor to controversial cuts to retiree pensions, city assets and union contracts. Many experts believe Rhodes will allow Detroit’s case to proceed.

“What happens if he rules them ineligible for bankruptcy?” said Michael Sweet, a municipal bankruptcy attorney with Fox Rothschild who is not involved in the case. “Everyone is even worse off with a ruling by the judge that there wasn’t eligibility.”

Here are some frequently asked questions.

Why is this eligibility trial necessary?

Bankruptcy code requires municipalities to prove that they are insolvent, have obtained the state’s approval to file for bankruptcy and have negotiated in good faith or can no longer do so. The city and creditors argued in hearings last week about the legal issues associated with its bankruptcy filing, but the eligibility trial will address whether Detroit has met the needed criteria.

Will there be witnesses and testimony?

Yes. Detroit Emergency Manager Kevyn Orr is expected to take the stand in what will be his first court appearance of the bankruptcy case. Representatives for the creditors will testify, too, including fire union chief Dan McNamara and police union president Mark Diaz.

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Jones Day attorneys for the city as well as lawyers for the creditors will introduce evidence after weeks of discovery and depositions.

How long will this last?

Some experts expect it to last several days. Rhodes has scheduled Wednesday-Friday, Oct. 28-29 and Nov. 4-8 as potential days for the trial, should he need that much time. He is unlikely to issue a verbal ruling when the trial is complete. Instead, he will probably issue a written ruling, likely sometime in November, experts say.

Who is fighting the city's bankruptcy filing?

Several major creditors filed objections — all labor groups and no financial creditors — while more than 100 individuals have objected. Major objectors include Michigan Council 25 of AFSCME, the UAW, the city’s two pension funds, the fire and police unions and a committee representing the city’s 23,500 retirees.

What happens if Rhodes rules the city is not eligible for bankruptcy?

Theoretically, he would summarily dismiss the bankruptcy petition and the city would go back to trying to negotiate concessions with its creditors outside of court. The city would almost certainly be flooded with lawsuits from creditors who haven’t been paid. This is one reason why most experts believe Rhodes will allow the case to proceed.

Will Rhodes decide during this trial whether pensions can be cut?

No. Creditors have argued that Rhodes should block the bankruptcy because of the city’s plan to pursue pension cuts. But even if he allows the case to proceed, creditors will still get a chance to fight pension cuts later. The city has not officially proposed any cuts yet, although Orr has said they will be necessary. Orr is expected to reveal an initial restructuring plan by the end of the year, which will undergo changes over the 18 months that Gov. Rick Snyder’s administration has said the emergency manager will be in place.

“Even if Judge Rhodes believes that the Michigan Constitution prevents the pensions from being impaired, that’s not an argument to be decided” during the eligibility trial, Sweet said.